RS H.B. 1476 75(R)BILL ANALYSIS INSURANCE H.B. 1476 By: Bonnen 4-11-97 Committee Report (Amended) BACKGROUND Texas law is not in compliance with the United States Supreme Court decision in U.S. Department of Treasury v. Fabe, 113 S. Ct. 2202 (1993). In the Fabe decision, the Supreme Court found part of the Ohio receivership statute unconstitutional because the Ohio law permitted the payment of employee wage claims and general creditor claims ahead of federal government claims; however, the Court found constitutional that part of the statute permitting policyholder claims and administrative expenses to be paid ahead of federal claims. The Texas priority scheme in receivership has the same deficiencies held unconstitutional in the Fabe decision. The current priority provision of the Texas Insurance Code, permits payment of administrative expenses, policyholder claims, employee wage claims, and secured creditor claims ahead of federal government claims. Because the Texas priority scheme could be challenged on the same grounds as the Ohio statutory scheme, the statute could be held unconstitutional. In that event, all claims would have to be paid on a pro-rata basis after federal government claims. PURPOSE This bill amends Article 21.28, Sections 6 and 8, Insurance Code to correct the priority scheme for receiverships to conform to the Fabe Supreme Court decision and avoid potential lawsuits relating to constitutionality. The bill will affect the Life, Accident, Health, and Hospital Services Insurance Guaranty Association, the Texas Property and Casualty Insurance Guaranty Association, and the Texas Title Insurance Guaranty Association. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not specifically grant any additional rulemaking authority to a state officer, institution, or agency. SECTION-BY-SECTION ANALYSIS SECTION 1. Amends Section 6, Article 21.28, Insurance Code by deleting language relating to the priority of employee wage claims and adding language classifying employee wage claims as a Class 1 claim (See Amdt #2) under Section 8(a) of this article. SECTION 2. Amends Section 8(a), Article 21.28, Insurance Code by establishing new priorities for payment of claims. Deletes language classifying employee wage claims as Class 1 claims. Adds language making federal government claims Class 3 claims. Adds language protecting the validity of the provisions of this subsection in the case that one part of the subsection is held invalid. Makes conforming changes. SECTION 3. (See Amdt #2) - Amends Section 10(a) and 10(b), Article 21.28 to read as follows: (a) Clarifies that claims are to be paid to the receiver except where the reinsurer and the insured have a legally permissible agreement which is made prior to the insolvency of the insurer and provides that the reinsurer will pay the insured directly in the event of the insurer's insolvency or where the reinsurer assumes the insurer's liability to the insured through an assumption reinsurance agreement, relieving the insurer of liability. (b) Adds language providing that when two or more assuming insurers are involved in the same claim and a majority of the interested parties elect to interpose a defense, the expenses shall be apportioned in accordance with the reinsurance agreement. SECTION 4. Effective Date: September 1, 1997. SECTION 5. Emergency Clause. EXPLANATION OF AMENDMENTS Amendment #1: Amends SECTION 3 of bill by adding Section 10 (a) & (b), Article 21.28, Insurance Code as follows: (a) Committee amendment #1 clarifies current language required in reinsurance agreements to insure that the proceeds of any reinsurance agreements with an insolvent insurer are paid to the receiver and for the benefit of all the claimants against the insolvent insurer except in two specifically defined exceptions: (i) where the contract or agreement entered into prior to the proceeding specifically provides for reinsurance in the event of insolvency of the ceding insurer, or, (ii) where a party assumes the obligation of the ceding insurer pursuant to an agreement between the parties. The reinsurance shall be payable on the basis of approved claims allowed in the liquidation proceeding pursuant to Section 3(h) of this article. (b) Adds language stating that when two or more insurers are involved in the same claim, expense of the defense shall be apportioned in accordance with the reinsurance agreement as if the expense had been incurred by the ceding insurer. Committee Amendment #2 : Committee amendment #2 corrects a drafting error by deleting the phrase "Class 4" on page 1, line 17 and replacing it with "Class 1".